China Flash #3

It appears that the Government will push forward with further growth in infrastructure investment this year. This is good news for dry cargo demand but may lead to a reduction in steel exports. A new price policy for domestic corn may change the dynamics of grain supply and demand going forward.

Domestic COAL prices face downside risk as heating demand has peaked in Northern China while industrial activity is not sufficiently strong to boost demand for coal-fired electricity. The market also faces new uncertainty as the China Railway Corporation intends to adjust rail freight in a bid to boost shipments. If rail freight is adjusted down domestic coal prices in ports may fall in April. Coastal freight rates climbed further last week. The outlook for thermal coal import shared by traders and utilities is negative. The four leading miners in China have announced they will keep prices steady in April and traders are consequently reluctant to book cargoes. Indonesia’s low-CV coal prices are not expected to drop further as the present prices are close to cost levels.

IRON ORE AND STEEL markets have seen positive developments so far this year. The National Development and Reform Commission (NDRC) announced on Monday that investments in new infrastructure projects in January and February increased more than 40% compared to last year. This is in line with what we heard earlier this month, that the government will ensure at least 20% growth in infrastructure investment in 2016. We have also seen more nickel ore cargoes recently than we have seen during the past two months.

The GRAIN market is subject to a new policy on domestic corn pricing. According to NDRC the price of corn going forward will be fully determined by the market. Instead of subsidizing the corn price, which the government had previously done, the new policy will provide subsidies directly to farmers in major corn-producing regions in North Eastern provinces. The new pricing scheme is intended to reduce overcapacity of corn production as certain regions are expected to turn to other agricultural products once the new policy is being implemented. One potential consequence could be that we see more domestic soybean production and less import of sorghum and wheat.

Otherwise it is being questioned to what extent we will see a substantial reduction in overcapacity in the steel, coal, cement and non-ferrous metal sectors this year due to large outstanding debt. Although China is prepared to provide more than 100 billion yuan in the next two years to handle layoffs in coal and steel companies, these funds are said to be made available only once debts have been settled. Costs for the estimated 1.3 million coal-sector layoffs alone are as much as 195 billion yuan. China’s statistics bureau puts coal and steel debts alone at 8 trillion yuan.

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